What Is Average Order Value (AOV)?
Average Order Value (AOV) is a key performance metric that calculates the average amount spent by customers per order. It is determined by dividing the total revenue by the number of orders. AOV helps businesses understand customer purchasing behavior, assess marketing effectiveness, and identify opportunities to increase sales.
Why is Average Order Value (AOV) Important?
AOV is important because it directly impacts a business's revenue and profitability. By increasing AOV, a business can increase its revenue without necessarily increasing its customer base.
This can be achieved through strategies such as upselling and cross-selling, offering discounts on bulk purchases, or implementing a minimum order value for free shipping.
Furthermore, AOV can help businesses understand their customers' buying behavior and preferences. By analyzing AOV data, a business can identify which products or services are most popular, which customer segments are spending the most money, and which marketing campaigns are driving the highest value customers.
How to Calculate Average Order Value
Average Order Value Formula
Calculating the average order value is a straightforward process. First, you must decide what time frame you want to reference in your data. This could be a week, a month, a quarter, a year, etc.
Next, use this formula to calculate your AOV for that time frame:
Average order value = Total amount of revenue from sales ÷ total number of orders placed
An Example of AOV Calculation
Imagine that Company X sells clothing online. During April, they process 500 orders and make $3,500 in sales from those orders. Therefore, for April, their average order value would be $7.
Factors That Impact Average Order Value
1. Product Pricing
Products with high price points (including luxury items) will usually result in a high average order value. Conversely, lower-priced items will result in a low average order value.
2. Product Mix
If a brand offers both high-priced and low-priced products, the majority of customers may purchase the low-priced products. However, even a few high-value orders will skew the brand's AOV higher.
3. Promotions and Discounts
Offering promotions and special discounts may increase the total number of orders within a certain time frame. However, it may also decrease the individual value of each order. In some cases, promotions may result in a lower AOV but higher overall sales.
4. Order Size
Customers who make large orders that include multiple items will increase a company's average order value. If such large orders are irregular, it may be helpful for business owners to calculate AOV both with and without them, to gain a more accurate representation of their typical sales revenue.
For example, if an eCommerce store processes 200 orders in a week and makes $8,500, its AOV is $42.50. However, if one customer made an order that totaled $600, the store owner may choose to remove that order from his or her calculations. In that case, the AOV would come to $39.70 ($7,900 ÷ 199).
5. Customer Lifetime Value
Customer lifetime value (CLV) measures the revenue generated from one customer through their commitment to the company (or "lifetime").
Average order value and customer lifetime value could be considered "two sides of the same coin." If your average CLTV is high, then current customers will be more likely to do repeat business with your brand and may spend more on their purchases over time (thus raising your AOV).
6. Shipping and Handling Cost
High shipping and handling costs may discourage customers from making larger purchases, thus reducing the brand's AOV. In contrast, offering free or reduced-cost shipping — perhaps once an order reaches a certain dollar amount threshold — may encourage larger purchases, thus raising the company's average order value.
7. Consumer Behavior and Demographics
Customers from different demographics will often engage in different buying behavior. For example, older consumers may be more likely to make larger purchases; while younger consumers may be more price-sensitive. The makeup of a brand's core audience will play a large role in determining its average order value for any given time frame.
Note: Other metrics can be used in conjunction with average order value to gain a clearer picture of customer behavior. For example, business owners can also examine modal order value (MOV), or the most frequently occurring order value. To illustrate: imagine that a brand's AOV is $20 but it's MOV is $15. Instead of increasing AOV in general, the owner may decide to focus on upselling the $15 orders in particular, since those are the biggest revenue drivers for the business.
8. Seasonality or Special Events
Many brands see an upsurge in sales (and average order size) around holidays and special events. Online shoppers often have stronger intent to buy and may be more willing to bundle their purchases in large orders to save on individual items. For example, an eCommerce store that offers 20% off selected items and free shipping for orders of $50 or more may attract more customers during peak season.
9. Personalization and Targeting
Brands that personalize the shopping experience and target specific demographics with their marketing may enjoy a higher AOV. For example, customers may be more willing to make large purchases based on personalized recommendations.
10. Brand and Customer Loyalty
Customers that are loyal to and trust a brand will be more likely to purchase from the company, perhaps regularly. They will also be more likely to consider making a large purchase from the brand.
